Ownership Culture vs. Traditional Culture
May 31, 2007
ESOP Companies are More Productive discusses how ESOP companies can increase the level of participation by embracing an open-book management style and actively involving the employees (both individually and in workgroups) in the decision-making process. Studies have demonstrated that ESOP companies with a high level of participation and a consistent ESOP communication and training program are more productive and grow faster than non-ESOP companies. We also recently discussed and provided examples of a company Combining Broad-Based Employee Ownership and Participation in the Management Process as well as the benefit of Immediately Focusing on Building an Ownership Culture.
This NCEO article further defines an Ownership Culture. They use W.L. Gore & Associates as an example of a company with a true ownership culture (for more information on W.L. Gore's six secrets of innovation success, check out this post.) They provide Jackson's Hardware, whose ESOP story is discussed in The Ultimate Employee Buy-in, as an example of a "typical employee ownership company".
The article defines six essential components to a successful ownership culture:
- "An ownership stake: Employees receive and maintain a level of ownership that is financially significant to them."
- "Ownership understanding: Employees understand what ownership means."
- "Entrepreneurship training: People are trained to have the skills not just to do their own jobs, but to understand how the business works; they learn to be effective."
- "Sharing information: Companies share financial and performance information with employees at the company and work team levels."
- "Short-term incentives: Everyone shares in the short-term rewards of company success."
- "Employee involvement: Employees have structured, regular opportunities to have meaningful input into decisions concerning the work they do."
The article also compares the six components to a traditional culture and provides links to additional resources.
Lean Enterprise Institute
May 29, 2007
I hope everyone had a happy and safe Memorial Day weekend.
This blog post talks about the exclusion and non-participation of people at work. It also discusses the Lean Enterprise Institute and how eliminating waste is an easy way to build ESOP and company value. What is Lean?
"A business system for organizing and managing product development, operations, suppliers, and customer relations. Business and other organizations use lean principles, practices, and tools to create precise customer value—goods and services with higher quality and fewer defects—with less human effort, less space, less capital, and less time than the traditional system of mass production."
Immediately Focusing on Building an Ownership Culture
May 24, 2007
This article discusses the success story of a one-year ESOP company, Cal-Tex Protective Coatings Inc., which immediately started focusing on building an ownership culture. They were the 2007 Grand Prize Winner of The Innovations in Employee Ownership Award:
"The 80 employee owners of Cal-Tex make aftermarket products including paint, fabric and leather sealants for automobile dealers, but their most impressive accomplishment is showing how much a small visionary company can accomplish. Rather than an aspiration, the Cal-Tex statement of values and purpose actually do permeate the internal company culture and relations with customers. One of the company's core values is humility, which management exemplifies by shifting an astounding level of decision making to the work force. Aided by intensive daily sharing of financial data, employees set their own production goals in accord with the company's quarterly goals. Those who meet their goals gradually achieve the status of Certified Employee Owner (CEO), a status that gives them the right to attend company planning sessions regardless of their job titles. The judges wrote "this company's employee owners engage themselves in their company's success profoundly and personally-the level of creativity, connection and exuberance at Cal-Tex amazed us.""
Spring 2007 Edition of the Retirement News for Employers: Retirement Trends/Final 415 Regulations/Focused Examinations/Interim Amendments/Final 402A Roth Regulations/Various Links
May 23, 2007
The Spring Edition of the Retirement News for Employers is online. Here are some of the highlights:
- Promoting Retirement Security in America – This opening section cited some "sobering" retirement plan trends. I found this trend particularly alarming:
"GAO notes that between 2000 and 2005 the personal savings rate was 1.3 percent, one sixth of the average since World War II. And in 2006, it was a negative 1 percent."
- Final 415 Regulations Published – See the Rules and Regulations section of our site for more information.
Critical FewPoints…By Monika Templeman (Director, EP Examinations) – This year's Critical FewPoints are Expand Compliance Contacts, Research & Analysis, and Focused Examinations. The new Director of Employee Plans Examinations started by introducing herself. This article focuses on the Focused Exam Methodology that they have been using for the last 18 months during audits. This approach narrows the scope of the examination initially and later expands the scope if needed:
"Upon the agent's visit for the examination, if he or she finds good creditability, finds no surprises from the initial interview, and finds the internal controls to be good, then we most likely will not have a need to expand our audit beyond the items initially selected to examine."
The article provides some useful links:
- The Fix Is In: Common Plan Mistakes – This discusses how to address the "Failure to Timely Adopt Interim Amendments". The article discusses the two-step process to satisfy legistlative change deadlines:
1. An interim amendment is required to be filed
2. If the interim amendment is adopted in good faith, then the plan sponsor has an extended time
period, also known as the remedial amendment period, to adopt any requirements missed in the
interim amendment.
If the plan sponsor does not timely adopt an interim amendment, then the plan document will not be considered a timely amendment and they will lose the use of the extended remedial amendment period. The article provides 3 examples of interim amendments and notes that interim amendments do not include amendments to correct operational failures or amendments adopted after the remedial amendment period has expired.
The article discusses how to correct the problem using the Voluntary Correction Program (VCP) and reiterates that employers need to have a system in place to ensure that it doesn't happen again.
- Subscribe to a FREE IRS Newsletter for Business – Here is a link.
- DOL News – This section discusses the Request For Information (RFI) requesting comments on fee and expense disclosure issues affecting 401(k)-type Plans. This section also discusses the interim final rule regarding QDROs. More information can be found in the Rules and Regulations
section.
- Product Profile – Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) – This section discusses the following plan-language publication: Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
The Filing Cabinet – Although most of these publications were also listed in the Spring edition of Employee Plan News, I will list them again:
Net Gains – This provides information about various sections of their website:
- Final Designated Roth Accounts Under Section 402A Regulations Published – Final Regulations under section 402A were published on April 30, 2007. The article answers this Question: What is a Designated Roth Contribution? It also provides the following links: Retirement Plans FAQs regarding Designated Roth Accounts and Publication 4530 - Designated Roth Accounts Under a 401(k) or 403(b) Plan
- EP TDI Notices - The IRS reinstated the generation of the EP Taxpayer Delinquency Investigation (TDI) Notices for the plan year ending December 31, 2004. For more information, check out the above mentioned Retirement Plans FAQs regarding CP 403 and CP 406 Notices - Delinquency.
Let's Just Take It One Three-Month Period at a Time – This calendar provides upcoming deadlines and seminars. The following deadlines were listed:
- July 15 – Second quarterly installment due date for the 2007 plan year
- July 31 – "Form 5500 Day" – File IRS Form 5500, Form 5500-EZ, or IRS Form 5558 (providing an extension until October 15, 2007) by this date
- Timing is Everything – This page is a flyer designed to give to employees. The flyer contains some basic retirement tips for employees from the IRS.
Here are some links prior posts discussing previous editions of The Retirement News for Employers and the Employee Plan News publications.
Spring 2007 Edition of Employee Plan News: Staggered Remedial Amendment Cycles/EPCU Projects/FAQ: Loans, Hardship Distributions, Plan Investments, CP 403 Notices, and CP 406 Notices/Small Business Products/IRS and DOL Guidance/PBCG Insights/New Form 5330 and New Publications 560 and 590/Potential 402(i) Resolution/EP Taxpayer Delinquency Investigation (TDI) Notices/EP Benefits Conferences
Winter Edition of Retirement News Winter Edition of Retirement News for Employers: Notice 2007-07/PPA Information Page/T.D. 9294 Use of Electronic Media/Automatic Rollover IRAs/Lost Participants/Terminating Plans/Payroll Deduction IRA/Self-Correction Program/401(k) Checklist/DOL News/IRS Form 5558/2007 IRS Tax Calendar/Upcoming Deadlines
ESOP Survival Rates/Employee Tenure Study
May 22, 2007
The latest NCEO Employee Ownership Update is online.
ESOP Survival Rates
The Update discusses the survival rate of ESOPs. The ESOP survival rate for ESOPs established in the 70s is 20%, 80s is 40%, and the 90s is 50%. The article also noted that ESOP companies are more likely to stay in business than their non-ESOP counterparts. For more information on ESOP terminations, check out this post: ESOP Terminations
Employee Tenure Study
The Update also referenced a study by the Employee Benefit Research Institute. Here is a link to the press release.
The study looked at the impact of many factors such as gender, age, and sector (public vs. private) on employee tenure. Using the study as support, the Update discusses how the perception that employee turnover has increased over the years is a myth, and how employee turnover has not significantly changed in the last 25 years. The Update added that ESOP companies tend to have higher job tenure rates than their non-ESOP counterparts:
"We do not have comparable detailed data for companies with employee ownership plans, but the data we do have indicate that job tenure rates are significantly longer than industry norms and that the percentage of employees who say they plan to look for new jobs is much lower."
The study also said that the persistence of job changing has retirement implications, including a decrease in participation in and existence of defined benefit plans and a potential reduction in remaining retirement plan account balances at retirement, as well as the public policy impact of these implications.
Using an Auction to Establish Account Value
The Update also discussed how a company is using an auction to establish the account value for employee stock options.
30th Annual ESOP Conference: ESOPs: Creating a REAL Ownership Society
May 21, 2007
I attended the 30th Annual ESOP Conference ESOPs: Creating a REAL Ownership Society last week in Washington, D.C.
The following press releases highlight some of the announcements made during the conference:
One of the most popular sessions at the conference is the Annual Federal Agency Practitioners' Forum. The Forum is setup to give ESOP practitioners an opportunity to interact with IRS and DOL employees. Many ESOP questions were submitted in advance and a handout was distributed with 140 questions along with comments from the IRS and the Department of Treasury. Of course, they are quick to point out that the comments only represent the individual opinions of the federal agency representatives and are not binding. Nonetheless, the comments are very helpful and give insight into how the agencies are looking at current topics. I will discuss some of the highlights of the discussion in a separate post.
The ESOP Promotion and Improvement Act of 2007
May 10, 2007
The ESOP Association published the following press release on its website:
The President of The ESOP Association Urges Congress to Enact the ESOP Promotion and Improvement Act of 2007 and Start Building an Ownership Society
The press release announces the introduction of The ESOP Promotion and Improvement Act of 2007 (S. 1322) on May 7, 2007 by Senator Blanche L. Lincoln (D-AR). The press release summarized the highlights of the Act as follows:
- Repeal the punitive 10% penalty tax on S corporations' distributions from current earning, also referred to as dividends, paid on ESOP stock that are passed through to ESOP participants in cash
- Clarify that dividends paid by C corporations on ESOP stock are not a preference item in calculating the corporate alternative minimum tax
- Permit sellers of stock to an ESOP on an S corporation to utilize the ESOP tax benefit referred to as the tax deferred rollover or the 1042 treatment
- Permit proceeds received from a 1042 transaction to be invested in mutual funds consisting of operating US corporation securities
- Redefine what is a 25% or more owner for purposes of IRC 1042 to be 25% or more ownership of voting stock, or 25% or more ownership of all stock of the corporation, not 25% of any class of stock
- Increase the de minimus amount eligible for diversification from ESOP stock balances over $500 to balances over ESOP stock $2,500
The ESOP Association website also addresses the following Frequently Asked Questions About S. 1322:
- How much will the proposed ESOP Promotion and Improvement Act of 2007 Cost the Federal Treasury?
- Why should S Corporation ESOPs be exempt from the 10% early withdrawal penalty tax when the purpose of ERISA plans such as an ESOP is to hold money for retirement, not to have it passed through and spent before retirement?
- Would employees of an S corporation pay the regular federal tax rate on their dividends?
- What purpose is served by exempting C corporations with ESOPs from the corporate AMT?
- Why is it necessary to have the tax deferred rollover treatment, or 1042, for sales of S corporation stock to an ESOP, when the gain on sale of S stock is usually not as great as the gain on sales of C corporations?
- Why should certain 25% owners of stock in an ESOP also acquire stock acquired in a 1042 transaction participate in the ESOP?
- Since the Enron and other corporate collapses, experts, and many in Congress have urged more diversification of company stock in ERISA plans, not less; so why would Congress wish to raise the de minimus rule for the opportunity of ESOP participants to diversify from company stock as they near retirement?
ESOP Terminations
May 8, 2007
We provided a link to the first part of a research project on ESOP terminations in the following post: Reasons for ESOP Termination/ESOPs and Economic Development/Next Step in Tribune Transaction Here are some of the highlights of the report:
- There are between 8% and 10% new ESOPs each year. The average net growth rate of ESOPs is approximately 3.3% per year. The difference is a result of ESOP terminations.
- The results from the first phase of the study were obtained from interviews. Due to the small sample size (30 interviews), the results of the first phase may not be representative of the total ESOP population.
- The study split ESOP terminations into companies that were acquired ("acquired companies") and companies that continued to exist after the termination ("termination companies").
- Acquisition was the most common reason cited for ESOP termination. Most acquired companies reported strong or very strong performance.
- The second most common reason cited was the future repurchase obligation. This reason was more important to terminated companies.
The next step of the study is to collect data from ESOP administration firms to test some hypotheses about ESOP termination. Here are some of the common ESOP termination hypotheses that were consistent with the interview data:
- "Small companies are more likely to terminate ESOPs." (termination companies)
- "Highly profitable companies are more likely to terminate ESOPs." (acquired companies)
- "Highly profitable companies are less likely to terminate ESOPs." (termination companies)
- "Companies facing sever downturns are more likely to terminate ESOPs." (termination companies)
- "Companies with strong ownership cultures are less likely to terminate their ESOPs." (acquired and termination companies)
- "Companies where the ESOP owns a substantial percentage of shares are more likely to terminate their ESOPs." (acquired companies)
- "Future repurchase obligation would force companies to underinvest in their own growth; to avoid this situation, companies terminate their ESOPS." (termination companies)
- "Management supports an outside offer to purchase the company." (acquired and termination companies)
- "ESOP participants support an outside offer to purchase the company." (acquired and termination companies)
Combining Broad-Based Employee Ownership and Participation in the Management Process
May 7, 2007
- This article tells the story of Reflexite and the benefit of combining broad-based employee ownership with participation in the management process:
- "Companies that share ownership broadly grow 6 percent to 11 percent per year faster than would have been otherwise expected, as long as they have a corporate culture that centers around giving employees the tools and authority to share ideas and information to improve performance. Employees know how the company, their operation and their group are doing. They have specific structures, such as work teams, in which they can make decisions to make the company better.
By contrast, companies that use traditional command-and-control management styles actually perform worse after an ESOP, having raised expectations they fail to meet."
- Reflexite's ESOP Education Committee has received an Annual Award Communications Excellence (AACE) award in 3 of the last 4 years. Reflexite was also the 2006 Grand Prize Winner of the Innovations in Employee Ownership Award
- "Reflexite, an employee ownership company since 1985, has consistently been a pioneer in ownership management practices and a leader in the employee ownership community. This award, however, recognizes Reflexite's sophisticated approach to integrated ownership, involving not only its ESOP, but a stock option program, a monthly cash "owners' bonus," a global ESOP, and a recently introduced stock purchase plan. This extremely rare combination of short-, medium- and long-term ownership programs complements an extensive education and information-sharing system and ambitious employee"
- The article also compares the differences between employee ownership at United Airlines and Southwest Airlines.
- We also discussed this topic in the following post: ESOP Companies are More Productive.
Employee Involvement Tips/S Corporation ESOP Taxation/Transfer of QRP to a GRAT
May 4, 2007
The latest NCEO Employee Ownership Update is online. It discusses how the leaders of Google and W.L. Gore and Associates share employee involvement tips. Google allows 20% of an employee's time to pursue any project of mutual interest. W.L. Gore allows associates to pursue their own projects. The World's Ten Greatest Innovators discusses both W.L. Gore and Google, including W.L. Gore's six secrets of innovation success:
- "The Power of Small Teams: Gore tries to keep its teams small (and caps even its manufacturing plants at 200 people). That way, everyone can get to know one another and work together with minimal rules, as though they were a task force tackling a crisis.
- No Ranks, No Titles, No Bosses: Associates (employees) select mentors, they don't have bosses. Associates decide for themselves what new commitments to take on. Committees evaluate an associate's contribution and decide on compensation. There are no standardized job descriptions or categories.
- Take the Long View: Gore is impatient with the status quo but patient about the time -- often years, sometimes decades -- it takes to develop revolutionary products and bring them to market.
- Make Time for Face Time: There's no hierarchical chain of command; anyone in the company can talk to anyone else. Gore discourages memos and prefers in-person communication to email.
- Lead by Leading: Associates spend 10% of their time pursuing speculative new ideas. Anyone is free to launch a project and be a leader, so long as they have the passion and ideas to attract followers. Many of Gore's breakthroughs started with one person acting on his or her own initiative, and developed as colleagues helped in their spare time.
- Celebrate Failure: Don't stigmatize it. When a project doesn't work out and the team kills it, they celebrate with beer or champagne."
I have tried to stay away from the constant barrage of uninformed, negative articles. However, sometimes an article is so negative or so uninformed (or both), that it must be discussed. The Update references a Newsweek article that refers to the S corporation ESOP as a "tax dodge". The Update points out that if the ESOP were taxed, the earnings would effectively be taxed twice, both at the corporate level and at the participant level. This blog post compares the S corporation ESOP tax exemption to charitable contributions that are only available if ownership is shared with the employees, adding that it "seems more like a gift than a tax dodge".
The Update also discusses how the IRS ruled in two private letter rulings (PLRs) that the transfer of Section 1042 qualified replacement property (QRP) to a grantor retained annuity trust (GRAT) does not constitute a disposition of the QRP. One of the PLRs also indicated that a contribution to a charity would not constitute a disposition. One of the PLRs was also discussed in the March 2007 edition of the ESOP Report.
The Benefits of ESOPs and Employee Ownership to Companies
May 1, 2007
We previously discussed the Benefits of ESOPs and Employee Ownership to Employees. Effects of ESOP Adoption and Employee Ownership: Thirty Years of Research and Experience also studied the benefits of ESOPs and employee ownership to companies: